Cautious Commonwealth declares $4.7b record

By Danny John

14 August 2008 — 12:00am

THE Commonwealth Bank yesterday held back from declaring an even higher profit than its latest $4.7 billion record result, after taking an ultra-cautious approach to the danger of the faltering domestic economy throwing up more bad debts than expected.

With the issue of bad debt cover hanging over all of the major banks, Commonwealth chose to set aside $212 million as part of a $930 million charge to cover the possibility of more sour loans among its 9 million customers.

In all, the bank revealed its collective provision had more than doubled from last year's $434 million as a result of debts owed by a number of so-called "bad boy" borrowers - including Centro Properties and Allco Finance Group - plus individuals. It has since contained its corporate loan problems.

Yesterday's disclosures showed the country's largest bank's total bad debt account stands at $1.74 billion, more than half of it accrued in the year to the end of June. Nonetheless, the extra amount held back any significant increase in the bank's annual profit, which recorded a 7 per cent gain to just less than $4.8 billion. On the industry's preferred measure of performance - net cash earnings - the figure was up just 5 per cent to $4.73 billion. Revenue showed a 10 per cent increase to $14.3 billion.

The flat profit outcome had been widely expected by analysts and investors. The result was reflected in the group's second-half profit, which crept ahead by 1 per cent to $2.39 billion, and by the overall 3 per cent rise in earnings per share that closed out the full year at $3.57. It has also shown up in the profit share-out to investors, with the final dividend up by just 4c to $1.53 and the total payout for the year up by 10c to $2.66.

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The figures underlined that the double-digit profit increases and dividend rises of the past few years have been halted s by the global turmoil in equity and credit markets. That volatility will mean Commonwealth's two major rivals, ANZ and National Australia Bank, will suffer write-offs of at least $2 billion between them in the second half and a $1.4 billion combined fall in profit - while also prompting the merger between Westpac and St George.

The Commonwealth still struggled to offset the effect of the downturn on operations such as home lending - where higher financing costs wiped $279 million from its earnings despite the bank pushing through increased interest rates.

While saying he would not guarantee passing on the full effects of an interest rate rise because of the bank's financial pressures, Mr Norris cautioned against gloominess about the economy's ability to bounce back. Lending growth had slowed, he said, though it would only be slightly below the average recorded over the past 10 years.

Commonwealth shares slipped 46c to $44.05, holding their fall to half of the 2 per cent drop recorded by the ASX 200 index.